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January 12, 2016

Some Farmers in Mato Grosso will not Fulfill their Contracts

As a result of the low yields due to the adverse weather, some farmers in Mato Grosso may also not be able to meet their commitments to deliver all the soybeans that they forward contracted. Even though the rainfall has improved in Mato Grosso over the last two weeks, the rains are coming too late for the early maturing soybeans that were severely impacted by the hot and dry weather during November and December.

The Noticias Agricolas agency reported last Friday that the hardest hit areas of Mato Grosso are the northern and eastern regions. The president of Aprosoja-MT reported that in these areas there are some fields that went 40 days without a rain and are now a complete loss. Other fields received limited rainfall resulting in various levels of losses.

In the municipality of Sorriso, which is the largest soybean producing municipality in Brazil, some farmers forward contracted 60-70% of their anticipated soybean production. The average historical yield in the municipality is 60 sacks per hectare (52 bu/ac), which means that these farmers have committed to deliver as much as 45 sacks of soybeans per hectare (39 bu/ac). Unfortunately, some of these same farmers are only expecting to harvest 10-20 sacks per hectare (9 to 17 bu/ac), which means that they will be forced to default on their contracts. A similar situation is playing out in other regions of the state as well.

If a farmer owns his own land, it's a bad situation, but if he rents land to grow soybeans, it is even worse. In Sorriso for example, a typical rent might be 12 sacks per hectare (10 bu/ac) and it costs approximately 30 sacks per hectare (26 bu/ac) to produce the crop. In a normal year he might expect to produce 58-60 sacks per hectare (50-52 bu/ac) so his profit would be 16-18 sacks per hectare (14-15 bu/ac). Unfortunately, this year he may only produce enough soybeans to pay the rent much less his cost of production.

As a result, farm organizations in the state have already reached out to the grain companies and the banks to start the discussion on what may be done to address this situation. These organizations are advising farmers to document their losses with photos and testimonials from local agronomists and farm managers so that they will be better able to negotiate with their lenders. They have also asked the state government to declare a state of emergency in their municipality as an additional bargaining chip.

For some farmers, the situation is even worse. During the first half of 2015, the Brazilian government was slow in making credit available for the early purchase of needed inputs for the 2015/16 crop. Therefore, some farmers contracted with the grain companies to purchase the inputs in dollars when the currency was trading at 3.2 to 3.3 Brazilian reals to the dollar. The currency is now trading at approximately 4 reals to the dollar. As a result, these farmers must now pay back much more than what they burrowed due to the weaker currency, and at the same time that they have very poor yields. Needless to say, this is the worst of both worlds.

The farmers would like to be able to prorate their contracts over a 3-4 year period, but the grain companies and the banks have not indicated what they might do to help their customers. My guess is that the grain companies will eventually work out a deal allowing their customers to pay off their contracts over time. It would not be in anyone's interest to take the farmers to court due to the very long time it takes for anything to work its way through the Brazilian court system.